Trust Deed Investing or investing in debt secured by real estate has become very popular among investors that want to diversify into real estate and earn a stable return on invested funds (typically as high as 8-12% annually).
However, before diving into any investment, including a Trust Deed Investment, a prospective investor should understand the basics and what to look out for.
Unlike a direct real estate investment, with a trust deed investment the investor is acting like a bank by extending money to a borrower. Accordingly, the investor is able to earn fixed-income while securing those funds with the underlying real estate asset.
Because the investor is acting like a bank by extending a loan to the borrower, the borrower signs a promissory note, which is essentially a promise to repay the the loan plus interest, usually paid monthly, to the Investor. As with a real estate loan from a bank, the Note is secured by the underlying real estate property through a trust deed. In order to secure the investor’s interest in the property and the note and to provide public notice to any other lenders/lien holders that there is debt on the property, the trust deed is publicly recorded. As a lender, you are most secure if you hold a first position loan meaning that your loan is senior to any other debt on the property and must be paid first.
As an investor, you may become the owner of a note and the beneficiary under a Trust Deed either by making the loan (called an origination) or by purchasing or assuming an existing note and trust deed. In either case, you are the lender and are entitled to fixed interest income (usually paid monthly) and are secured by the real estate.
What to Look For:
Although investing in a first position trust deed offers investors a great way to earn high yields and consistent cash flow with the security of tangible real estate, proper diligence should be conducted. Here are the essentials:
- Loan-to-Value (LTV): The LTV is a key factor in any trust deed investment and represents the ratio of the loan amount relative to the value of the piece of real estate that the loan is secured against. The lower the LTV, the higher your level of security. In today’s market, first position trust deeds secured by single family homes typically have LTV’s between 65 and 75 percent. This means the property would have to lose approximately 1/3 its value for there to be risk to the Trust Deed Investor.
- The Underlying Real Estate: Although loans secured by real estate are protected by the value of the underlying asset, depending on the method of foreclosure, the nature of the loan, and the value of the property, the investor may or may not be able to recover his entire investment in case of borrower default and lender foreclosure. Thus, it is important to analyze the underlying asset as well as the LTV.
- The Borrower: The borrower’s ability to repay the loan and the borrower’s reputation, experience and background are all important considerations. As an investor you should review this information and understand the risk.
Once you understand the basics and know what to look out for, Trust Deed Investing can be a very beneficial investment option. These benefits include:
- Security: When you invest in a loan secured by real estate, you are secured by the underlying real estate. That means if the borrower defaults on the loan (i.e. by failing to pay interest on the loan or by failing to pay back the principal balance of the loan upon the maturity date) the Investor has recourse against the Borrower. This recourse is to foreclose on the property and sell it to recoup the investment.
- Returns: Many economists believe 2013 could be a very volatile year in the stock market due to higher taxes, health care costs, spending cuts and high unemployment rates. And with money market accounts currently paying a paltry 0.5% and the 30-Year US Treasury Bond yielding only about 3.3% per year, investors are seeking out alternative Investment options that provide more healthy returns. Trust Deed Investments, with yields ranging from 8-12% annually, are a great option for these investors.
- Consistent Monthly Cash Flow: Most Trust Deeds pay interest on a monthly basis. This means that as a Trust Deed investor, you get monthly cash flow.
- Limit Exposure: A trust deed investor gets exposure to real estate without directly owning and managing the underlying asset. Thus trust deed investing offers investors a more secure way to diversify into real estate.
How It Works On RealtyShares
At RealtyShares we are currently offering our investors an opportunity to invest in high yield (typically 9% or greater) first position trust deed investments. You can purchase these trust deed investments individually or through a corporation, LLC and even an IRA.
The process to invest is simple:
- Once you have created a user account and verified that you are an accredited investors, you can browse real estate investments, including both equity investments and Trust Deed investments.
- You can conduct all of your due diligence online including with respect to the LTV, reviewing information on the Borrower, reviewing information on the underlying real estate, etc.
- Once you feel comfortable with a specific investment, you can execute all legal documents and transfer all funds via RealtyShares’ secure online investment dashboard.
- Passive & Streamlined: The process is streamlined and the investment is 100% passive to the investor. RealtyShares handles all of the paperwork and manages all of the parties involved.
- Diversification: By investing in a Trust Deed through RealtyShares, you can invest as little as $5,000 per investment. Accordingly, you can diversify across a wider range of trust deed investments than you could if you purchased the Trust Deed directly.
- First Position: At RealtyShares, all of our Trust Deed Investments are in first position which minimizes the risk to our investors.
- Low LTV’s: The LTV’s for our Trust Deed Investments are lower than average which ensures the Borrower was sufficient skin in the game and the investor has a large equity cushion and is thus protected.
If you have any questions about specific Trust Deed Investments on RealtyShares, please reach out at firstname.lastname@example.org.